BVWire Issue #150-3 | March 18, 2015


VPOs to meet with SEC with ideas to strengthen BV infrastructure

In a move that has global implications for the BV profession, representatives from several valuation professional organizations (VPOs) are heading to Washington, D.C., later this month to meet with the Securities and Exchange Commission (SEC) over new efforts to address the agency’s concerns about the state of the valuation profession. The SEC has criticized the BV profession as being too fragmented, with multiple credentials, different sets of standards, and a lack of consistency in qualifications and enforcement. This lack of unification has caused damage to market confidence, critics say.

Fair value focus: In a statement to members posted on several VPO websites, the American Institute of Certified Public Accountants (AICPA), American Society of Appraisers (ASA), Royal Institution of Chartered Surveyors (RICS), and The Appraisal Foundation (TAF), along with global valuation leaders from several large accounting firms and the International Valuation Standards Council (IVSC), began formal discussions in 2014 regarding proposed solutions to the expressed concerns of the SEC’s chief accountant. The concerns centered around the “broadening application of fair value and fair value-based measures in U.S. GAAP and its impact on the reliability and consistency of valuations being conducted for U.S. publicly traded companies.”

The participating VPOs agreed to spearhead a “new shared level of professionalism focused on a mandatory performance framework, education and quality assurance.“ The discussions have reached the point where potential solutions are ready to be presented to the SEC. After this meeting, the initiative will continue to be developed. When a specific plan is created, it will be submitted to interested stakeholders for public comment later this year, the statement says.

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Inputs to existing PTE valuation models are flawed

A new book presents research that challenges the pass-through entity valuation models used by the Tax Court and the IRS, which up to now have assumed that value is unaffected by shareholder taxes. The book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, by Nancy J. Fannon (Meyers, Harrison and Pia LLC) and Keith Sellers (University of Denver), is a major advance in thinking about S corp taxes and value.

Tax matters: The new book also challenges the inputs into the models used by the Delaware Chancery, the Supreme Judicial Court of Massachusetts, and those developed by valuation analysts. While these models generally make the assumption that shareholder taxes do affect value, they all inherently assume that the public-market return is affected by taxes as if such taxes were paid at the statutory rate, with no deferral opportunities.

The research demonstrates not only that all taxes affect value, but, further, that taxes are not borne at statutory rates. Rather, tax effects are muted by a combination of clienteles (most notably, institutional investors, many of whom pay no tax) and tax deferral opportunities. For this reason, prior models have likely overstated the magnitude of any adjustment that may be needed.

While not the focus, the book also points out the need for analysts to consider those instances in which an IRC Section 338(h)(10) election may be available to the parties to the hypothetical transaction.

The book will not be available until April, but it is available now for preorder if you click here.

In person: The authors will do a session on this topic at the NACVA 2015 Annual Consultants Conference, which will be held in New Orleans June 24-27. For details, click here.

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Appeals court does about-face on double dipping

So much for clarity! Valuators working on divorce cases may remember the storied Heller divorce case in which the Ohio Court of Appeals decided the issue of double dipping. Now comes an opinion in a case with similar facts that shows the same court changing its tune and throwing the double-counting theory into question.

Focal point dental practice: The husband was a 44-year-old dentist and the sole owner of his practice. At divorce, the husband’s expert determined the practice was worth $689,000 using an income—capitalization of earnings—approach. Under a similar method, the wife’s expert arrived at a FMV of $1.1 million. The difference in value stemmed from the application of a 30% marketability discount.

When it came to calculating income for spousal support, the husband’s expert decided that, even though the annual corporate income was around $500,000, he would only attribute $261,000 to the husband. To consider the total annual income would be to use the income that served as the basis for valuing the business—of which the wife received her share—a second time as the basis for determining spousal support. The wife’s expert said the husband’s income “available to him through his dental practice” was $520,000.

The trial court held the practice was worth $689,000 and awarded the wife half of that amount. At the same time, it found the annual income was about $500,000 and ordered monthly spousal support of $9,000 for seven years.

No harm done: The husband appealed, arguing the trial court’s decision conflicted with Heller. There, the Court of Appeals specifically said it was under a statutory mandate “to keep marital property division and spousal support separate, and to consider the potential ‘double dip’ … in cases where one spouse’s ownership in a going concern is discounted to present value and divided, and where excess earnings arising from that ownership interest will constitute part of the spouse’s stream of income into the future.”

This time, the Court of Appeals had a different take. On its own accord, it computed the present value to the husband of the additional income stream. It assumed that the husband’s additional income was $300,000 per year and he was to retire in 10 years. At a 5% discount rate, the present value of the after-tax income would be over $1.6 million, the court concluded. This “is almost one million dollars more than the determined value of the business,” it noted. “Those computations alone demonstrate that valuing the business using an income methodology does not ‘double count’ income to [the husband’s] detriment.”

Takeaway: According to the appeals court, there is no double dipping because a reasonable person, looking at its calculation, would see no harm to the husband, says Jim Alerding (Alerding Consulting). But that computation is based on an “absurd” 5% discount rate, and it does not follow any of the business valuation principles applicable to the determination of a cost of capital. As Alerding sees it, this is another illustration of divorce courts’ putting together an “equity package that is fair to both parties at least in the eyes of the court.”

Find a discussion of Bohme v. Bohme, 2015 Ohio App. LEXIS 325 (Jan. 30, 2015) in the May edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Is an Uber-like disruption coming to the healthcare industry?

Recent movement from the U.S.'s biggest retailers into the primary care business indicates that the healthcare industry may be in for a big disruption—just like Uber overhauled the traditional taxi industry, according to an opinion article on

Uber came out of nowhere and cashed in on the sharing economy—and in a short time the company hit a valuation of over $40 billion. Now Wall Street is searching for the next industry that can be Uber-fied, the article says. Walmart, Target, and Walgreens are just a few of the retailers to jump on the healthcare bandwagon.

War clouds? The article concludes: “There is no doubt that retail is making a big bet on health care. If it succeeds, the payoff will be enormous. But just as Uber is at war with the taxi industry, retailers will soon be at war with the large, publicly traded health care chains.”

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The Private Business Valuation Challenge is on!

Fledgling business valuators from colleges across the country will be competing in the fourth annual Private Business Valuation Challenge, which gets underway on April 1. The competition offers a unique opportunity for U.S. university teams of three to five students to assess the stand-alone value of an actual private company—and win cash prizes. Twenty-three valuation experts holding senior-level positions in their firms will act as judges during the preliminary and final rounds of the contest and provide valuable feedback to all participants. Twenty-five teams from 20 universities are currently registered.

Data arsenal: To prepare for the competition, participants receive free access to extensive information and databases of Business Valuation Resources, LLC (BVR), including Pratt’s Stats, Public Stats, Economic Outlook Update, BVR Desktop Learning Center, Valuation Handbook—Risk Premium Toolkit, Business Valuation Update, and others. This material explains why private and smaller public companies and other private establishments and ventures usually exhibit significantly lower multiples of value than larger public firms. The materials also demonstrate how to calculate these differences in multiples.

The case study used by the students is a recently professionally completed Moss Adams LLP valuation report (names and locations are changed for confidentiality). Student teams update the Moss Adams valuation report by one year and create video presentations for judges to view online. The teams making the best presentations are invited to present their valuations in person during the final round in Seattle on April 24-25.

The participating universities include:

Arkansas State University Santa Clara University
California State University
Seattle Pacific University
California State University
University of Baltimore
Colorado State University University of Maryland
Denver University University of Maryland
(University College)
Findlay University University of North Carolina
Lynn University University of Northern Iowa
Middle Tennessee State University University of Oregon
Northern Michigan University University of Southern Indiana
Purdue University University of Tennessee

BVWire wishes good luck to all of the teams!

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NYSSCPA BV event in New York City May 18

A powerhouse lineup of speakers will be at the annual business valuation conference in New York City on May 19, hosted by the New York State Society of CPAs. The speakers and topics include:

  • Nancy Fannon: Withstanding a Daubert Challenge; S Corp. Tax Adjustment;
  • Chris Mercer: Unlocking Private Company Wealth;
  • Mark Zyla: Fair Value Measurements;
  • Panel Discussion: Business Divorce and Appraisers with Sam Rosenfarb (Rosenfarb LLC) and Peter Mahler (Farrell & Fritz, P.C.);
  • Valuation Issues in a New York Divorce: Jeffrey Gilbralter (Klein Leibman & Gresen LLC) and Adam J. Wolff, Esq. (Kasowitz Benson Torres Friedman LLP);
  • Brian Pearson: Fairness Opinions; and
  • Juli Saitz: Preparing Expert & Rebuttal Reports

This is the premier event for valuation and forensic professionals in the New York City area. For details and to register, click here.

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BV movers . . .

People: Shawn Fox joins Willamette Management Associates’ Chicago office as managing director in forensic accounting services and will focus on complex litigation and bankruptcy cases and investigative matters … Stuart Gilson, professor at Harvard Business School, will serve as an expert witness on business valuation, credit analysis, and corporate finance for Cornerstone Research … Cyndi Livermore was named partner at the New Hampshire firm William E. Howell LLC, which will rebrand as Howell & Livermore LLC … Kent Swartzberg joins the Bellingham, Wash., firm VSH PLLC as senior accountant focusing on business valuations and forensic accounting.

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Gary Trugman, former IRS attorney Martin Basson discuss defensible reports

Gary Trugman (Trugman Valuation Associates) and attorney Martin E. Basson, formerly with the IRS, will discuss the unique requirements of preparing and submitting valuation reports that hold up under IRS or court scrutiny in their webinar Preparing Reports for Litigation and the IRS on March 19. Don’t miss it!

Here are a few other upcoming webinars of interest:

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

VPOs meet SEC

PTE valuation flaws

Double dip flip-flop

Healthcare disruption

BV Challenge is on!


BV movers

CPE events








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